Question

Dorsey Co has expanded its operations by purchasing a parcel of land with a building on it from Bibb Co. for $86000. The appraised value of the land is $20.000, and the appraised value of the building is $107.000. Required: a. Assuming that the building is to be used in Dorsey Co's business activities, what cost should be recorded for the land? b. Indicate why, for income tax purposes, management of Dorsey Co would want as little of the purchase price as possible allocated to land. c. indicate why Dorsey Co. allocated the cost of assets acquired based on appraised values at the purchase date rather than on the original cost of the land and building to Bob Co. d. Assuming that the building is demolished at a cost of $12.000 so that the land can be used for employee parking, what cost should Dorsey Co, record for the land? Complete this question by entering your answers in the tabs below. R ed A Required Required equired Assuming that the building is to be used in Dorsey Co.'business activities, what cost should be recorded for the land? (Round final answer to the nearest whole dollar amount.) Cost of land Required )

Answer 1

a. Cost of Land = $86000 x $20000/($20000 + $107000) = $86000 x $20000/$127000 = $13543

b. Land is not a depreciable asset.

Land value will not reduce taxable income.

c. Appraised values are to be used because they represent the asset's current value.

d. Cost of Land = $86000 + $12000 = $98000

Assuming that the building is demolished, the entire purchase price plus the cost of demolition will be recorded as the cost of land since it is the cost incurred to prepare the land for its intended use.